Sentiment in financial markets took a turn for the worse during the past week. In the words of David Galland (Casey Research – The Room): “The best analogy I can come up with to describe this past week is that it has been like being caught out in a massive thunderstorm. There’s hail (SIVs collapsing) … thunder (likely re-rating of insurers such as MBIA, which put the stamp of approval on so much toxic paper) … lightning (America’s largest financial institutions teetering)… strong winds (major corporations like GM getting blown sideways) … and even typhoons (China coming out of the closet and saying there is a new global currency regime in the works).”

Before highlighting some thought-provoking quotes from market commentators during the past week, let’s briefly review the markets’ actions on the basis of economic statistics and a few performance charts.

Economy
The past week was characterized by a parade of woes as far as business news and economic reports were concerned and a realization that round two of the summer’s credit crisis is developing. This is creating an environment of additional fear and rising uncertainty about what an economic slowdown could mean for consumer and business spending.

Sen. Charles Schumer, chairman of Congress’s Joint Economic Committee, said he was concerned about a big downturn on the horizon. “Quite frankly, I think we are at a moment of economic crisis stemming from four key areas: falling housing prices, lack of confidence in creditworthiness, the weak dollar and high oil prices,” said Schumer. “Each of these problems alone would be enough of a threat to our economic well-being. But taken together, they are essentially the four horsemen of economic crisis.”

This week’s economic highlights include Pending Home Sales and the Treasury Budget on Tuesday, Retail Sales, PPI, and Business Inventories on Wednesday, CPI, Initial Jobless Claims, the New York Empire State Index, and the Philadelphia Fed survey on Thursday, and Net Foreign Purchases, Industrial Production, and Capacity Utilization on Friday.

Global stock markets
Global stock markets were rattled during the past week by the deepening credit problems and received a hard thrashing on worries of write-downs and declining profits. No stock market escaped unscathed, with US stocks falling on four out of five days. Financial stocks around the world, the NASDAQ Composite Index (-6.5%) and emerging markets like China (-8.0%), Hong Kong (-5.5%) and India (-5.4%) were particularly hard hit.

Global fixed-interest and currency markets
Global bonds were the main beneficiaries of expected slower economic growth as investors switched from stocks to bonds perceived to offer safe-haven status. The yields on US Treasuries declined on the short end while longer-term maturities remained almost unchanged to further steepen the yield curve. The 10-year US Treasury Note yield fell to its lowest level in more than two years.

On the currency front the US dollar remained under severe pressure in anticipation of further interest rate cuts, and recorded an all-time low against a basket of currencies (using the US Dollar Index as a measure). Talk of diversification out of US dollar assets by an increasing list of central banks and other entities capped rally attempts. The Japanese yen had a strong week, putting the carry trade at risk and triggering the sell-off of high-yielding assets.

Commodities
Commodities experience a mixed week as the economically sensitive sectors came under pressure, but energy and precious metals remained at high levels.

Industrial metals displayed further weakness, with copper declining by 5.4% during the week, after losing 11% during the previous four weeks. Rising LME stocks and a turnaround in the Baltic Dry Index pointed to a widespread demand slowdown.

The oil price came within striking distance of $100, stoking further inflation concerns. Silver (+6.5%) was the star performer among the precious metals complex, reaching a 27-year high. Gold (+3.2%) nearly reached its 1980 record high of $850 again and platinum hit an all-time peak (although closing down by 2.1% for the week).

This week promises to be a key week for financial markets. Hopefully the words (and pictures) from the investment wise will assist in guiding us through the stormy waters and make the correct investment decisions.

John Mauldin (Thoughts from the Frontline): The “R” word
“Jim Cramer used the ‘R’ word on his show last night: recession. I think it is more likely than not. The Fed is going to cut and cut again. The dollar is going down some more. It is dangerous out there for relative return investing.”

Economy.com: Survey of business confidence for world
“US business confidence remains disconcertingly soft. Confidence is consistent with an economy that is expanding very slowly. Businesses are particularly dour in their broad assessment of current conditions and expectations regarding the six-month outlook remain firmly negative. Confidence is measurably stronger elsewhere, most notably in Asia. Sentiment is weakest among those in housing and financial services, and strongest among high-tech firms.”

David Fuller (Fullermoney): Economic uncoupling
“Within an increasingly integrated global economy, there can be no complete economic uncoupling, in the event of a significant problem in one important region, namely the USA in this instance. However over half of global GDP now comes from so-called emerging markets, and their proportion of growth is increasing much more rapidly than in the developed countries. Consequently, the old adage: ‘When the US sneezes, the rest of the world catches a cold’, has given rise to the mildly complacent: ‘When the US sneezes, the rest of the world goes shopping.’ Over all, GDP growth trends suggest that the USA will remain an important influence, albeit of gradually declining impact.”

MarketWatch: US faces risks of downturn, inflation – Bernanke
“The US economy not only faces the risk of a sharp slowdown from the housing market’s contraction but also of an inflationary surge from sharply higher crude-oil prices and the weaker dollar, Federal Reserve Chairman Ben Bernanke said Thursday. In prepared testimony to the Joint Economic Committee of Congress, Bernanke painted a picture of an economy in a perilous position, even though it has shown remarkable resilience so far this year, with third-quarter gross domestic product rising at a solid 3.9% annual pace. Bernanke said that he and his colleagues on the policy-setting Federal Open Market Committee expect the economy to slow ‘noticeably’ from the third-quarter growth rate and remain sluggish in the first half of 2008. But Bernanke also suggested that the hawkish members of the Fed might have a point about inflation. There were downside risks to the subdued growth forecast, and upside risks to the benign inflation outlook, Bernanke said.

“Regarding the outlook for rates policy, Bernanke said only that the FOMC would continue to assess the economic data and financial market developments ‘and will act as needed to foster price stability and sustainable economic growth.’”

David Fuller (Fullermoney): What are the Fed, US Treasury and White House trying to do?
“Following their deeds rather than words, I maintain that they will do everything possible to keep the US economy from sinking into a lengthy recession. Their ammunition is a massive reflation and a devaluing US dollar. This will cushion downside in the property market, preventing a crash, and they aim to buy a further uptrend in the US stock market, if only in terms of the shrinking US currency.

“This will cause additional asset inflation. From an American perspective, I would pursue asset diversification, stocks (in the US favour big-cap exporters and other companies that earn a high proportion of revenue overseas, not domestic economy shares), high-growth emerging markets, precious metals, art, antiques and other collectibles that you both like and understand. Quality US property will mostly hold its value, but is unlikely to outperform other assets anytime soon. I would avoid US Treasury bonds.

“UK investors should follow a similar strategy, and watch out for sterling when the Bank of England eventually signals a lower short-term interest rate policy. And shop in America, for value, as should all Europeans.

“Asian investors and those living in commodity exporting countries have the least-worst currencies but developing regions in particular will have higher inflation. However asset prices in your countries and regions should continue to perform well.

“As a general comment on stock markets, be prepared for further volatility.”

Anatole Kaletsky (Times Online): Ben Bernanke shouldn’t bow to pressure from doomsday economists
“The Fed Funds rate has been reduced by three quarters of a point since September, exactly equal to the easing undertaken in the US economy’s previous two mid-cycle slowdowns in 1995-96 and 1986-87.

“A more radical monetary easing would be justified only if the US and world economies were in the depth of recession. Given that the US economy is growing quite strongly, while the global economy is booming, a radical easing now would intensify potential inflation problems and add fuel to a global boom in commodity and asset prices that is already getting out of control. Yet because of the specific sector problems that are largely confined to housebuilding and mortgage banking, financial economists in America are promoting a different message. They suggest that the whole US economy is on the brink of recession, if not depression, and that the Fed should slash interest rates much more aggressively and rapidly, as it did in the recessions of 2001-02 and 1990-91. For the Fed to bow to such pressures for aggressive monetary action would be dangerous and futile, because it would do very little in the short term to revive the weak spots of the US economy – the financial sector and the low end of the housing market. Instead, it simply would fuel a potentially explosive inflationary boom in 2009 and 2010.

“At present, the bond prices on Wall Street are assuming at least two further rate cuts between now and the end of the first quarter. To restore the Fed’s freedom of manoeuvre and his own reputation, Mr Bernanke will have to remove these expectations. The best way for him to do this would be to make some hawkish statements underlining the Fed’s refusal to protect companies such as Citigroup and Merrill Lynch from the consequences of their management mistakes.”

Asha Bangalore (Northern Trust): US inflation expectations
“… the spread between the nominal 10-year US Treasury note yield and the 10-year inflation indexed Treasury security (see chart) has moved up from a low of 219 basis points in early-September, 2007 to 243 basis points as of November 7, 2007.”

Asha Bangalore (Northern Trust): Significant drop in consumer sentiment
“The University of Michigan Consumer Sentiment Index moved down to 75.0 in the early-November survey from 80.9 in October. This reading is the lowest since October 1992, excluding the Katrina and Iraq war declaration episodes (see chart). The upward trend of oil prices and the housing market woes have both clearly played a role in recent declines of the consumer confidence measures.”

Bloomberg: Supermodel joins hedge fund managers in dumping dollars
“Gisele Bundchen wants to remain the world’s richest model and is insisting that she be paid in almost any currency but the US dollar. Like billionaire investors Warren Buffett and Bill Gross, the Brazilian supermodel, who Forbes magazine says earns more than anyone in her industry, is at the top of a growing list of rich people who have concluded that the currency can only depreciate because Americans, led by President George W. Bush, are living beyond their means.

“’We’ve told all our clients that if you had only one idea, one investment, it would be to buy an investment in a non-dollar currency,’ said Gross, the chief investment officer of Pacific Investment Management Co. in Newport Beach, California, and manager of the world’s biggest bond fund. ‘That should be on top of the list,’ said Gross, whose firm is a unit of Munich-based insurer Allianz SE.

“Buffett, whom Forbes in April ranked as the world’s third-richest person behind Bill Gates and Carlos Slim, told reporters in South Korea last month that he is bearish on the US currency. ‘We still are negative on the dollar relative to most major currencies, so we bought stocks in companies that earn their money in other currencies,’ Buffett said October 25.

“Jim Rogers, a former partner of investor George Soros, said last month he’s selling his house and all his possessions in the US currency to buy China’s yuan. ‘The dollar is collapsing,’ Rogers said last week in an interview. ‘I’m moving to Asia because moving to Asia now is like moving to New York in 1907 or London in 1807. It’s the wave of the future.’

MarketWatch: Dollar stumbles to new lows on call for China sales
“The already stumbling US dollar fell to new lows on Wednesday, after a top Chinese official called for the country to shift more of its huge foreign-exchange stockpiles out of the beleaguered greenback. Cheng Siwei, vice chairman of the Standing Committee of the National People’s Congress, was quoted by wire services as saying that China should shift more of its $1.43 trillion of currency reserves into ‘stronger currencies’, such as the euro, to offset ‘weak’ currencies like the dollar. He also said that a rapid appreciation of the yuan – as Washington and increasingly Europe are requesting – is not necessarily the right move, though Cheng insisted the country wasn’t actively seeking a major trade surplus.

“Cheng ‘has in the past made errant remarks that have no bearing on policy,’ according to Marc Chandler, currency strategist at Brown Brothers Harriman. Nonetheless, the reports sent the dollar into a tailspin.

“’As if ballooning US credit/housing crunch data, back-to-back Fed cuts and soaring oil prices weren’t enough to stun the US dollar, now we have the spectre of central-bank reserve asset diversification out of US dollars to contend with,’ wrote Vincent Chaigneau, the head of fixed-income and foreign-currency strategy at Societe Generale, in a note to clients.

Marc Faber: Buy gold to side-step collapsing US dollar
“… whereas in the past cash could be perceived as ‘reasonably’ safe, today cash may, courtesy of modern central banking under the auspices of the US Fed, actually have become quite a dangerous asset class due to its depreciation not only against asset prices but also against consumer prices, if these were measured properly by government agencies.

“In short, the problem an investor is facing is the following: In the past, savers who wanted to avoid the problem of taking investment decisions and allocating their funds to different asset classes could keep their money in short term deposits. But in today’s new monetary regime – characterized by massive monetary and debt growth and central banks that seem to be perfectly happy at ‘printing money’, which leads to a loss of money’s purchasing power – savers are almost forced to invest into ‘something’ in order not to end up as ‘penniless billionaires’.

“My preferred asset currency is still gold and other precious metals. Near term, however, sentiment is overly positive and additional positions should only be taken on a setback.”

Richard Russell (Dow Theory Letters): Federal Reserve Notes are a blatant lie
“It really is sad. Here’s gold and silver mandated as the only money by the Constitution of the United States. Yet our citizens have been kept in the dark about gold for generations. Instead, Americans have been touted on the value of fiat money, rudderless money. This fiat money is created by a private banking cartel (the Fed). This transfer of US money-creation has never been authorized by a Constitutional amendment.

“I’ve said this before, but I’ll repeat it – the whole system of fiat (paper) money is the greatest fraud ever perpetrated on the American people. Our defense against this ‘counterfeit’ money is, and always has been, Constitutional money – gold and silver. Federal Reserve Notes (currently termed ‘dollars’) are a blatant lie. Today, rising gold is dragging that lie out into the open. Ultimately, the truth will out. Rising gold is shouting the truth – ‘gold is money, Federal Reserve Notes are a lie and an abomination.’”

“Can you run a great empire on borrowed money? My answer – you can for a while, but only for a while. Eventually, something’s got to give. The ‘give’ will come in the nation’s currency, in its standard of living – or in the demise of the empire itself. It happened in Rome, it happened in Britain, and I’m very much afraid it’s going to happen to the United States. The big question, of course, is the timing.

Bloomberg: Dollar slide may prompt joint intervention – Morgan Stanley
“The dollar’s decline to record lows may turn into a ‘more violent correction’ that requires the US, the European Union, and Japan to intervene in foreign- exchange markets, said analysts at Morgan Stanley. “Coordinated intervention may occur after the Federal Reserve has finished cutting interest rates and the European Central Bank has ceased raising them, the investment bank said. Japan may act if the yen approaches 100 to the dollar, the bank said. The three major economies are unlikely to intervene as long as the euro stays below $1.50, it said.

“’The dollar could potentially weaken meaningfully further,’ analysts Stephen Jen and Charles St-Arnaud wrote in a note sent to clients yesterday. ‘Though coordinated interventions may not be an immediate threat, they should now be on our radar screen.’

“Policy makers intervene in currency markets by arranging purchases or sales of foreign exchange. While US Treasury Secretary Henry Paulson has said repeatedly that a strong dollar is in America’s interest, he says the value of currencies should be set by the market. Under President George W. Bush, the Treasury has never intervened in the currency market.”

BCA Research: Bank stocks – still in a freefall
“While the relative performance of bank shares has plunged in recent weeks with spreads having blown out to new highs, it remains too early to bottom-fish as industry fundamentals are shaky. The ongoing housing debacle and widespread tightening in credit availability suggest loan demand will stay weak. Meanwhile, labor costs have not been pared back. Finally, the Fed signaled last week its intention to pause at its next meeting. Any interruption in the easing cycle could presents additional near-term headwinds for this sector. Bottom line: Bank profit prospects will remain dismal. Stay underweight.

Doug Casey (Casey Research): Gold – this is the big one
“This is the big one. We’ve been waiting for this for so long, and now it’s finally here. People forget that the US has had a 25-year economic boom – the bust has to be as big. And I hate to say it, but there’s a good case to be made that central banks have been suppressing the price of gold, exacerbating the necessary economic correction. Gold will be even more volatile, but this is it.

“I hate chasing markets, but this one is going to be so powerful, it’s going to surprise everyone. As I have been saying, gold isn’t just going through the roof; it’s going to the moon. So buy. I’m personally massively long gold and gold stocks, and I recommend the same to everyone. The easy money has been made, but big money lies directly ahead.”

Resource Investor: Gold is most preferred investment in India
“The Associated Chambers of Commerce and Industry of India (Assocham) says buying gold has become one of the most preferred forms of investments in the country. According to Assocahm President Venugopal hoot, income from gold has shot up by nearly 34% as the yellow metal is now the preferred choice for a major number of investors in the country. Addressing an Assocham function in Mumbai, he said: ‘Since disposable incomes of average Indians have gone up significantly, gold has become a preferred choice of investment for a large number of investors.’”

BCA Research: India and commodities
“India is still a predominantly service-oriented economy – with only 15% of GDP coming from manufacturing, compared with 43% for China. This implies that India will not follow the same trajectory in commodities consumption as China did during the last 15 years, unless it can turns into another global manufacturing hub. Still, strong capital investment in India will continue to provide underlying support for commodity prices.”